Seven New Stocks in My Purloined Portfolio

- By John Dorfman

In the twilight of his career, Kemmons Wilson, the founder of Holiday Inn, ran a smaller chain called Wilson World.

I visited one of his hotels with Wilson and admired the swim-up bar, a feature I had never seen before. Wilson said that he had seen one at a competitor's hotel and copied it. He was never ashamed, Wilson said, to take a good idea from a competitor.


In the same vein, I devote one column a year to stock ideas stolen from other money managers. I call it the Purloined Portfolio.

Lucky 13?

The Purloined Portfolio you are about to peruse is the 13th in a series that began in 2000.

On average, the stolen ideas in the first 12 columns have achieved a 12-month total return of 13.4%, versus 8.4% for the Standard & Poor's 500.

Ten of the 12 Purloined Portfolios have been profitable, and seven have beaten the S&P 500.

Bear in mind that results for my column picks are theoretical and don't reflect actual trades, trading costs or taxes. The record of my column selections shouldn't be confused with the performance I achieve for clients. And past performance doesn't guarantee future results.

Last year, I should have left the stolen fruit on the vine. Cal-Maine Foods Inc. (CALM), Teva Pharmaceutical Industries Ltd. (TEVA) and Toll Brothers Inc. (TOL) all hit the skids. The portfolio fell 9.22% even as the S&P 500 returned 7.35%.

Here are some new stocks I like from the holdings of my friends and rivals in money management. Note: My information is based on public filings. It's possible a manager might have sold one of the holdings I cite.

Commercial Metals

Commercial Metals Co. (CMC), based in Irving, Texas, recycles, fabricates and trades a variety of metals. The stock, at about $15, sells for less than half its peak price in 2008. It fetches only 14 times earnings and 0.4 times revenue, which I deem attractive multiples.

I drew this selection from Charles Royce, who runs a cornucopia of mutual funds at Royce Global Financial Services in New York.

JP Morgan

My next selection, JP Morgan Chase & Co., comes from the holdings of David Dreman (Trades, Portfolio), a noted value investor who recently moved his firm to Palm Beach, Florida. JP Morgan shares are selling for only a little over book value (corporate net worth per share), making them bargain priced in my estimation.

Big banks like Morgan have been subject to higher capital requirements and stricter regulation since the financial crisis of 2007-2009. And like all banks, it suffers from low interest rates, which make it hard to earn a good spread on lending. Yet Morgan's profitability has been inching up lately.

Lam Research

From the holdings of Scott Black (Trades, Portfolio), head of Delphi Management Inc. in Boston, I pick Lam Research Inc. (LRCX). Lam makes semiconductor equipment, and is a leader in machines that etch tiny grooves on semiconductor chips to hold the microscopic wires.

One of famed investor Warren Buffet's favorite measures of corporate success is growth in book value. Lam has been growing its book value at a 16% clip for the past ten years.

Lennar

To say that housing stocks went through the wringer in 2007 to 2011 is an understatement. It was more like a metal compactor. Now housing is staging an uneven, but in my opinion long-term, recovery.

Therefore I like homebuilding stocks including Lennar Corp. (LEN), the biggest holding in one of Ken Heebner (Trades, Portfolio)'s mutual funds. Heebner is the chief investment officer for Capital Growth Management in Boston.

Pfizer

My next pick is drawn from Randall Eley's portfolio at Edgar Lomax Co. in Springfield, Virginia. It's Pfizer Inc. (PFE), the $52 billion (sales) drug company based in New York City.

Pfizer sells for less than 13 times analysts' estimates of 2017 earnings. Pretty cheap for a company that hasn't had an annual loss in my memory, has worldwide reach, and sports a 3.6% dividend yield.

Wells Fargo

Wells Fargo & Co. (WFC) has been severely tarnished by a scandal in which employees opened millions of accounts without consumers' consent. Its CEO was forced to resign, and regulators are watching it like an angry hawk.

But Wells has a lengthy record of profitability, and the stock is on its knees now, at 11 times earnings and 1.3 times book value. I drew this one from the holdings of David Katz at Matrix Asset Management in New York.

Disclosure: I own Lam Research for most of my clients and personally. I own JP Morgan and Pfizer for some of my clients.

Correction: In last week's column, I erred in reporting the dividend yield on Amerisafe Inc. (AMSF). It is 1.2%, not 6.2%.
This article first appeared on GuruFocus.